Firm Productivity, Innovation, and Financial Development

How do firm-specific actions—in particular, innovation—affect firm productivity? What is the role of the financial sector in facilitating higher productivity? Using a rich firm-level data set, we find that innovation is crucial for firm performance as it directly and measurably increases productivity. The impact of innovation on productivity is larger in less-developed countries. Evidence of financial sector development influencing the innovation-productivity link is weak, but the effect is difficult to identify due to correlation between indicators of a country's financial and nonfinancial development. Furthermore, we find evidence that the innovation effect on productivity is more significant for high-tech firms than for low-tech firms. doi: http://dx.doi.org/10.4284/0038-4038-2011.201